Island Reversal

An Island Reversal features a grouping of days separated on either side by gaps in the price action. This price pattern suggests that prices may reverse whatever trend they are currently exhibiting, whether from upward to downward or from downward to upward.

• This price pattern occurs when two different gaps isolate a cluster of trading days.
• An island reversal changing from upward trending prices (bullish) to downward trending prices (bearish) is much more frequent than the opposite.
• Short-term exhaustion;  overbought / oversold conditions. (Also see: outside day)

An island reversal on June 11, 2020:

3 months later: the market did move higher, but 

the breadth was poor (small number of stocks participated):

S&P 500 has doubled from its March 2020 low

Now that the S&P 500 has doubled from its March 2020 low, what's next? 

A pullback if history is any guide.

Outside day

Outside day occurs when the low of the day is lower than the previous day’s low and the high of the day is higher than the previous day’s high. Candlestick or OHLC chart displays make it easy to see. Depending on where it occurs on the chart, this may signify a bullish (a) or bearish (b) key technical reversal.

 

(b)

Key reversal

A key reversal occurs when the market jumps up at the open to a new high and then closes below the previous day's lows. It tells us that something happened during the day to cause a sea change in mood for the worse.

• March 2, 2017,  KBE

• Dropped another 10% in the following several days: